Don’t Wait Until It’s Too Late Before You Start to Develop Good Financial Habits
Habits That Can Improve Your Financial Health
Our ability to meet goals and to becoming the person you want to be can be dependent on the habits that we have. Biting one’s nails, smoking, overeating, and other traits are all bad habits that can come in the way of becoming the best of persons.
The same truth applies to finances. If you have bad money habits, you can damage your financial health and this can affect your financial security in the long run. If on the other hand, you develop financial habits that are healthy, it will do wonders to any long-term requirements that you may have to pay for the education of your children, or for building up a corpus for retirement.
The sooner you develop such good financial habits, it will greatly increase your chances of meeting the goals that you have in this regard. Four financial habits that you need to start out on as soon as possible are:
1. Needs and Wants Must Be Separated
This is an essential step in developing healthy financial habits. You must know where your money is being spent, and then figure out where you need to allocate it, so that is used in the correct way.
You need to have a spending plan that you can easily adhere to, and impulse buying has to be avoided to help in building savings. Prepare a budget plan that takes into account the income that you can generate and gives you an understanding of your spending on monthly needs. Sum up the expenses for what you consider needs, like rent, car payments, internet, and cable costs, food and other essentials, as well as the desired monthly savings, and you will have automatically created a savings plan. This must be a sum that is below your expected income, and anything left over can be cash that is available to spend in any way you want.
This is the money that is then available to spend on any wants that you have. In this way, you can be sure that you are never overspending. Any savings that still accrue can then be deposited into your savings account. If you do this, you will find it easier to resist the temptation of spending, and it allows you to start the next month afresh. If you find you are consistently having extra money, it makes sense to increase your planned monthly savings amount.
2. Save Automatically
Find a consistent mechanism for savings that will ensure that you save a fixed amount as soon as you receive a paycheck as this can help you to make progress in long-term goals for savings. Whether you are putting your savings into investments or into a savings account, make sure the contribution is made automatically, so that the money is no more visible to you. This can reduce any temptation to spend this available amount.
What is the need for such a mechanism? If you do not have such an automatic savings plan, you may find that while you save $500 in one month, the next month you may have no money to save. You may have still saved money overall, but this is an irregular saving habit and is one that you can do without. Start small. Start with $100, save it consistently, and it will be of great benefit to you in the long run.
3. Participating In an Employer-sponsored Retirement Plan is Advisable
One financial habit that is important to build up is the saving you need for life after you retire from your earning career. Tax-deferred investment growth has a lot of power to keep your savings adding to constant growth. A major benefit that comes from retirement plans like 401(k) and others is that the money you put into this plans is pretax, and this reduces your immediate present tax liability by lowering your taxable income.
Where an employer chooses to match your contribution in a 401(k) plan, you can benefit and must take advantage of this gesture by contributing as much as you can. If you do not do so, you will lose the free money that your employer offers you. As an example, an employer can offer a retirement plan that allows you to contribute 5% of what you earn as salary and offers to put up a matching contribution of 3% of this amount. So, if you fail to put at least 3% into this plan, you are in effect, refusing a salary raise of 3%.
If there is no such retirement plan available with your present employer, you would do well to open a retirement account that is self-directed, like an IRA, so that you get the benefit of retirement savings that have a tax advantage.
4. Investing Must Start Now
Investors can use the time to their advantage if they save consistently and invest early. Compound interest is a powerful tool that keeps adding to the smallest of amounts over the years. In compound interest, the interest you get from your savings is added to the principally saved amount, thus leading to an increase in the interest you get, even if there has been no change in the interest rate. The earlier you start saving, the greater will be the advantage that you get from compound interest.
Boosting your rate of saving, as it can help you to benefit at times when there are periods of low investment returns.
If you are already into a habit of saving correctly, it is good. If not, it is never too late to develop it even now. You can have your own needs and goals, but they both cannot be satisfied at the same time. Set the right priorities for your goals, start building habits that are healthy, so that they help you to reach those goals. Keep needs and wants separate, save often and early, look for the advantages of retirement plans that are tax-friendly, and invest now so that your financial foundation is solid, and takes you in the direction you want to go.